The role of product and market information in an online marketplace

Abstract

In this paper, we study how provision of product information and/or market information affects buyers' and sellers' behavior and the resultant sales in an online marketplace. We first identify the Pareto-dominant equilibrium for the sellers' pricing decisions. Then, we study the impact of market parameters on the sales of the platform in equilibrium, under various information structures. We find that the platform's sales increase with the size of potential buyers but change nonmonotonically with the size of potential sellers. Next, we analytically characterize the platform's optimal information strategy as a function of the underlying market parameters. We find that while it is always optimal for the platform to reveal some information, it should be strategic about which information to reveal when faced with different supply and demand conditions. In particular, in a seller's market (high ratio of potential buyers to sellers), the platform should provide both product and market information to the sellers and buyers. However, in a buyer's market (low ratio of potential buyers to sellers), it is optimal for the platform to only provide the market information—providing both the product and market information would backfire on the platform by jeopardizing its sales.